Mighty Mint Co. produces a mint syrup used by gum and candy companies. Recently, the company has had excess capacity due to a foreign supplier entering its market. Mighty Mint is currently bidding on a potential order from Quality Candy for 5,000 cases of syrup. The estimated cost of each case is $21, as follows:
Direct material.......$7
Direct labor.........$5
Overhead..........$9
Total...........$21
The predetermined overhead rate is $1.80 per direct labor dollar. This was estimated by dividing estimated annual overhead ($1,080,000) by estimated annual direct labor ($600,000).The $1,080,000 of overhead is composed of $270,000 of variable costs and $810,000 of fixed costs. The largest fixed cost relates to depreciation of plant and equipment.
Required:
a. With respect to overhead, what is the opportunity cost of producing a case of syrup?
b. Suppose Mighty Mint can win the Quality Candy business by bidding a price of $18 per case (but no higher price will result in a winning bid). Should Mighty Mint bid $18?
c. Discuss how an allocation of overhead based on opportunity cost would facilitate an appropriate bidding decision.